- Powell expresses concerns about the economic impact of prolonged high interest rates.
- Markets anticipate potential rate cuts despite mixed signals from the Fed.
- Powell emphasizes the Fed’s independence amidst political pressures.
Federal Reserve Chair Jerome Powell expressed concern on Tuesday about the potential risks to economic growth if interest rates remain too high for an extended period.
Preparing for a two-day testimony on Capitol Hill, Powell highlighted the current strength of the economy and the labor market, despite some recent signs of cooling. He acknowledged some progress in reducing inflation and emphasized the Fed’s commitment to bringing inflation down to their 2% target.
“At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” Powell stated in his prepared remarks. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Powell’s comments come close to the one-year anniversary of the last interest rate hike by the Federal Open Market Committee. Currently, the Fed’s overnight borrowing rate is in the range of 5.25%-5.50%, the highest in 23 years, following 11 consecutive rate hikes after inflation reached levels not seen since the early 1980s.
Market expectations are for the Fed to start cutting rates in September, with another potential quarter percentage point reduction by year-end. However, FOMC members indicated at their June meeting that only one rate cut might be necessary.
‘Strengthen our confidence’
Powell and his colleagues recently indicated that inflation data has been somewhat encouraging after an unexpected increase earlier in the year. Inflation, measured by the Fed’s preferred personal consumption expenditures price index, stood at 2.6% in May, down from a peak above 7% in June 2022.
“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell said. “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”
These remarks are part of the congressionally mandated semiannual updates on monetary policy. Following his prepared remarks, Powell will answer questions from the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.
In previous testimonies, Powell has avoided making dramatic policy announcements and navigated politically charged questions from committee members. This year’s questioning could be particularly contentious amid a volatile presidential campaign.
Political Tensions
Several Democratic committee members, including Sen. Sherrod Brown, D-Ohio, urged Powell to lower rates soon. “I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the progress we’ve made on creating good paying jobs,” Brown told Powell. “If unemployment trends upward, you must act immediately to protect American jobs. Workers have too much to lose if the Fed overshoots its inflation target and causes a completely unnecessary recession.”
Powell has consistently emphasized the Fed’s apolitical stance, maintaining that it does not take policy sides outside of its designated roles. He reiterated the importance of the Fed’s “operational independence” to effectively carry out its mandate.
Powell’s other remarks focused on the overall economic outlook. Recent data shows the unemployment rate inching higher and broad economic growth, as measured by gross domestic product, slowing. Both the manufacturing and services sectors reported contraction in June.
Nevertheless, Powell noted that “the U.S. economy continues to expand at a solid pace” despite the GDP deceleration. He added, “Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending.”
Potential Impact on the Stock Market
Powell’s caution about maintaining high interest rates for too long could have significant implications for the stock market. Historically, high interest rates tend to dampen economic growth, which can negatively impact corporate earnings and investor sentiment. If the Fed signals an earlier-than-expected rate cut, this could boost stock prices as borrowing costs for businesses decrease, potentially leading to higher investment and consumer spending. Conversely, if the Fed maintains high rates longer than anticipated, stock markets might experience volatility due to concerns over slowed economic growth and reduced corporate profitability.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
